"The tree that is
beside the running water is fresher and gives more fruit."
—Saint Teresa of Avila
(Spanish, 1515-1582)
Word for the day
Mythoclast (n)
A destroyer or debunker of
myths.
Malice towards none
Is Modi luck waning?
First random thought this morning
In present day India, Dr. B. R. Ambedkar shares the top pedestal
with Mahatma Gandhi, insofar as the political echelons is concerned. In fact,
it would not be surprising, if the number of people revering Ambedkar far
exceeds those admiring Gandhi.
The irony however is that the awareness about Ambedkar is mostly
limited to him being the head of the constitution drafting committee. Unlike
Gandhi, he has not been opened to a deeper and wider public scrutiny.
PM Modi has candidly expressed his (and BJP's) admiration for
Ambedkar, without any experiment with truth.
No gain without pain
Many readers have sought my views on the much talked about subject
of "trade war".
Well, to be honest, I do not think I am competent enough to offer
an intelligent view on this extremely complex issue. Moreover, I find it
unnecessary, given that millions of reams are being written on the topic by
experts. Nonetheless, I must share my rather generalized belief that suits to
this situation and guides my investment strategy.
One of the key principles of economics which underpins the very
concept of globalization is that "trade can make everyone better
off".
Conceptually therefore no one should have a problem as such with
trans border trade, so long it benefits the people at large in both the
producer and consumer jurisdictions. The problem should arise when political
expediency interferes with the free trade or the changes in circumstances of
one or more trade partners require a major "reset" in the trade
relationships.
These resets are usually referred to as trade war in common
parlance.
Globalization as old as human history
A Wikipedia tour of human history is sufficient to realize that
the "globalization" is as old as the human race itself. Since ancient
times, people (and animals) have been immigrating to far off, and often
unknown, places in pursuit of water, food, congenial weather, and safety of
children. The pursuit of material knowledge and spiritual elevation has also
taken people to new places. In relatively recent history, people have also
moved in the search of wealth and power.
With people, also immigrated their knowledge, food, life style,
traditions and prejudices. The global growth was therefore faster, more
symmetrical, and definitely development and growth oriented. The quality of
human life improved dramatically each century till beginning of the end of 20th
century.
The evolution of modern day mathematics, and therefore, other
branches of scientific enquiries, are a classic example of collaborative
research, enabled through free movement of people and knowledge. The concepts
of zero and decimal conceived in Indian sub-continent travelled unhindered to
the western world via Arab mathematicians and laid foundation for modern
economics, mathematics, physics, astronomy, aeronautics, etc.
Modern nationalism has impeded growth
Unfortunately, the modern day concept of Nationalism (restrictive
immigration of knowledge & people) has not helped anyone but a handful of
people endowed with extraordinary leadership qualities who chose to become
political or military leaders. The global growth therefore has been slow,
asymmetrical and often harmful to the humanity in general.
The current episode of economic strife must be seen in this
context.
Foundation of trade - "Do what you do best"
As the famous economist Gregory Mankiw wrote in his popular book Principles
of Macroeconomics — "Trade allows each person to specialize at what he
or she does best, whether it’s farming, sewing, or home building. In the same
way, nations can specialize in what they do best. In both cases, people get a
wider range of choices at lower prices."
Trade wars may be as old as trade itself
In the year 1689, British monarch William of Orange put steep
tariffs on French wine. He wanted to encourage the British to drink their own
booze - make and drink. It was not a great idea because without wine, Britain
turned to the hard stuff - gin. So for the next 50 years, England was in the
grip of the so-called gin craze. And newspapers wrote about the surge in crime
and death and unemployment.
In 18th century, Britain put trade restrictions and taxes on tea
being shipped to the colonies. This eventually led to Boston Tea Party, an
iconic event in American war for independence.
In the 1800s, the Brits were importing a lot of tea from China,
and they didn't like the trade deficit, so they started to export opium to
China, which caused an opium epidemic in China. China put a tariff on the opium
and then banned it altogether. This led to the very bloody Sino-British Opium
Wars. The Qing lost the war. This defeat is popularly believed to be the first
step in the direction of establishing modern day China.
Restrictions on the trade of cotton textile, indigo, salt etc. by
British empire on India inspired many key events in India's war of
independence.
Soon after its unification in 1871, Italy turned to protectionism
to foster its “infant” industries. It terminated its trade agreement with
France in 1886; raised tariffs as high as 60 percent to protect its industries
from French competition. The French government responded by passing the highly
protectionist Méline Tariff of 1892, which famously signaled the
death knell of the country’s flirtation with free trade. This eventually pushed
Italy closer to Germany and Austria-Hungary in the years leading up to the
First World War.
A famous example of protectionism gone awry is 1930’s Smoot-Hawley
Tariff Act—which along with similar protectionist measures enacted around the
globe—helped torpedo world trade and exacerbate the Great Depression leading to
the WWII.
In post WWII era, US trade restrictions on Cuba, Iran, Iraq,
Russia, North Korea, Syria etc. have had significant impact on global strategic
balance.
Wider economic sanctions on India in the wake of 1998 nuclear
tests, helped India developed indigenous technologies and evolve as a major
power in space technology.
There is a strong view that America’s last “trade war”,
with Japan in the 1980s, was one of the best things that ever
happened to American industry and consumers, because American businesspeople
rose to the challenge of the time. The "quality movement" spread across
the country. Businesspeople, previously outraged by the Japanese “stealing”
trade secrets, decided to join the club and took to “benchmarking” on an
industrial scale, often with Japanese companies as their targets. The benefits
of all that attention to quality were large and durable for US businesses and
consumers. In the end, the “war” did not prove to be destructive.
The point is that there is evidence of trade wars causing
structural shifts and paradigm changes in global economy. However, there is
little to suggest that but for trade wars, world would have been a better
place.
China is seeking escape velocity
The current episode of trade war must be understood in the
following context.
In post cold war era of past three decades, the world has been
unipolar, totally dominated by US.
China has labored hard for over five decades, since beginning of
cultural revolution in 1966, to emerge as a potent global force. In past three
decades it has subsidized the global economy by providing cheap labor and
capital. It has funded a large part of the US and EU fiscal deficits, which in
turn has kept the global market afloat during the global financial crisis. It
also helped the developed economies in protecting their environment by letting
them relocate most of their polluting industries to China.
There is no surprise if China now seeks to move into higher orbit
by asking to be treated at par with developed countries. To meet this end, it
has cracked down massively on polluting industries by shutting huge capacities.
Tightened financial regulations and committed to more open access to its
markets.
US obviously feels threatened by China's advances. Hence the trade
war.
In my personal, deeply subjective and mostly intuitive view, this
war will open the way forward for the world saddled with mountains of debt,
sitting at the verge of environmental disaster and struggling for growth. The
war if escalated will rebalance the global equilibrium and open opportunities
for emerging economies like India.
To the question, whether the gains will happen without pain, I
must answer with an emphatic NO.